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investors believe that the firm will be able to make good on the remaining interest 665567

Suppose a firm issued a 9% coupon bond 20 years ago. The bond now has 10 years left until its maturity date but the firm is having financial difficulties. Investors believe that the firm will be able to make good on the remaining interest payments, but that at the maturity date, the firm will be forced into bankruptcy, and bondholders will receive only 70% of par value. The bond is selling at $750.

Yield to maturity (YTM) would then be calculated using the following inputs:

 

Expected YTM

Stated YTM

Coupon payment

$45

$45

Number of semiannual periods

20 periods

20 periods

Final payment

$700

$1,000

Price

$750

$750

The yield to maturity based on promised payments is 13.7%. Based on the expected payment of $700 at maturity, however, the yield to maturity would be only 11.6%. The stated yield to maturity is greater than the yield investors actually expect to receive.

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